Overhead Allocation Overhead Allocation of DG Fashions (pvt) Ltd Analysis of the method Evaluation of Existing Method Benefits of Existing Costing Method Limitations of Existing Costing Method Implementing an alternative method Activity-Based Costing Comparison of traditional costing and ABC Application Steps in development of an ABC System Reported benefits Reported drawbacks Opportunities in implementing ABC method Barriers in Implementing ABC method Conclusions

1. DG Fashions (pvt) Ltd.
Assignment No. 1
Group-08
August 2014
BBA2202: Cost and Management Accounting
Course Coordinator: M.S.Nanayakkara
Department of Accounting and Finance
Faculty of Management and Finance
University of Ruhuna

2. Page | 2
Certification
We hereby certify that the material presented in this report is original and no other persons’ work
or ideas have been used without acknowledgement.
1. MF/2012/3221 M.S. Siddeq
2. MF/2012/3225 H.P.M. Mihirani
3. MF/2012/3246 K.R. Dulakshi
4. MF/2012/3351 N.W.U.D.G.K.G. Jayasekara
5. MF/2012/3389 M.K.M. Ihraz
6. MF/2012/3400 H.M.P. Caldera
7. MF/2012/3404 G.A.K. Dayarathna
Submission Date: 22/08/2014

3. Page | 3
Acknowledgement
We are really grateful because w e managed to complete our Cost and Management Accounting
assignment within the time given by our Ms. M.S.Nanayakkara. This assignment cannot be
completed without the effort and co-operation of our group members, Dulakshi, Gayan Kithma,
Madhini, Medha, Sabry & Raz. We also sincerely thank our lecturer of Cost and Management
Accounting BBA 2202, Ms. M.S.Nanayakkara for guidance and encouragement in finishing this
course. Last but not least, we would like to express our gratitude to the financial manager of DG
fashions (pvt) Ltd and the staff for the support and willingness to spend time with us and proving
information.

4. Page | 4
Content
Acknowledgement 03
Table of Content 04
1.0 Introduction 05
2.0 Overhead Allocation 05
2.1.1 Overhead Allocation of DG Fashions (pvt) Ltd 06
2.1.2 Analysis of the method 11
2.2.1 Evaluation of Existing Method 13
2.2.2 Benefits of Existing Costing Method 14
2.2.3 Limitations of Existing Costing Method 15
2.3.1 Implementing an alternative method 17
2.3.2 Activity-Based Costing 17
 Comparison of traditional costing and ABC 17
 Application 18
 Steps in development of an ABC System 19
 Reported benefits 20
 Reported drawbacks 20
2.3.3 Opportunities in implementing ABC method 20
2.3.4 Barriers in Implementing ABC method 21
3.0 Conclusions 23
References 24
Appendices 25

5. Page | 5
Introduction
DG Fashions is an apparel Company which was established in early 1999 in Dickwella, Mathara,
Sri Lanka. They have been dealing with the Manufacturing of lady’s bra, night wears, skinners,
lingerie and gents undergarments for over 12 years. With the experience accumulated though the
years, they are known as one of the most reliable suppliers in Sri Lanka in the product range for
its trend-lead styles, color of the season, fine quality and fast delivery. D.G. Fashions now run
factories that produce woven, men, and kids’ products. Their concept is to provide the best they
can in terms of product quality and price competition.
Currently DG Fashions has more than 500 members in all departments and they have their own
state of art production facility. They have their own steady apparel processing factory, advanced
equipments, high skilled work force and first class quality management system.
DG Fashions company takes the quality as the basis seeks development through goodwill and
sticks on the principle of providing products of high quality and low price for internal clients. Due
to high starting points they have decided to march into the international market. To adjust to the
customs & convention of different region of country, the design department of the company
design products of different styles to satisfied the demand of different clients
Vision
DG Fashions are around the world by year 2020
Mission
To provide customer satisfaction oriented products to the market at all locations through
innovations, highest standards & contemporary developments.

6. Page | 6
2.0 Overhead Allocation
Businesses use costing methods to allocate costs to various products and services. They add up all
costs of manufacturing a product in order to assign a total cost to it. This includes direct costs,
such as labor cost, and overhead costs, such as depreciation on machinery. The allocation of
certain overhead costs to produced goods is required under the rules of various accounting
frameworks. In many businesses, the amount of overhead to be allocated is substantially greater
than the direct cost of goods, so the overhead allocation method can be of some importance.
There are two main overhead allocation methods
 Traditional costing method
The allocation of manufacturing overhead (indirect manufacturing costs) to products on
the basis of a volume metric such as direct labor hours or production machine hours. As
manufacturing becomes more sophisticated the manufacturing overhead costs usually
increase while the direct labor hours or production machine hours decrease. Hence, the
direct labor or machine hours are unlikely to be the root cause of the manufacturing
overhead.
 Activity Based costing Method (ABC)
Activity-based costing (ABC) is a costing methodology that identifies activities in an
organization and assigns the cost of each activity with resources to all products and
services according to the actual consumption by each. This model assigns more indirect
costs (overhead) into direct costs compared to conventional costing.

7. Page | 7
2.1.1 Overhead Allocation of DG Fashions (pvt) Ltd.
The DG Fashions Company currently uses Traditional Costing method also known as practical
capacity method to allocate overhead cost per unit. Although practical capacity method of
allocation method has been criticized by many researchers as being ineffective in allocating
overheads to unit price of a product or service, other studies have emphasized that no particular
method can give absolute accuracy, but carefully complied and used in appropriate circumstances,
one or more of these should provide acceptable results.
The company uses the direct labor hours as the capacity to compute overheads rate per unit for
financial purposes.
- Working hours per day - 8 hrs.
- Working days per month - 23 days
- Direct labors - 500
Direct labor hours 8*23*500=92000
Overheads per unit = Total Overheads per month (refer table 01)
Total units per month
= 5,745,562.14
92,000
= 62.45

8. Page | 8
The following information is about the cost spent to produce a men’s T-shirt by DG Fashions
which they export to USA.
Note: some of the figures we have used bellow are hypothetical and they are used only for
studying purposes.
Table: 01
Overheads Amount
(LKR)
Salary 3,011,935.14
EPF 526,432.50
ETF 78,964.98
Electricity-0203 75,482.88
Electricity-9792 89,706.88
Water 14,324.80
Maintenance-Factory 26,879.00
Machine Repairing 5,970.00
Depreciation Plant & Machinery 272,194.14
Depreciation Building 50% 61,135.53
Depreciation Furniture & Fitting 33,546.16
Depreciation Motor Vehicle 50% 38,917.89
Printing Stationary 50% 43,209.25
Postage 50% 1,007.50
Telephone Exp-SL Telecom 4,255.00
Traveling-50% 4,385.00
Cleaning 50% 13,964.50
Transport Expenses-Nilwella 24,230.00
Transport Expenses-Gandara 63,180.00
Transport Expenses-Walakanda 68,172.00
Transport Expenses-Aparekka 59,280.00
Transport Expenses-Tangalla 72,400.00
Transport Expenses-Radampala 36,800.00
Transport Expenses-Beliaththa 59,000.00
Tea & Meals 22,388.00
Medical & Medicines 2,607.00
Newspapers & Other Office Exp. 1,415.00
Security Expense 81,250.00
Repair & Services-KB 5940
Fuel & Oil-KB 5940 1,200.00
Fire Insurance 8,830.80
Financial Cost-20% 922,498.20
Provision For Recruitment Charges 20,000.00
Total Expense 5,745,562.14

9. Page | 9
Table: 02
COST SHEET
Product Men’s T-Shirt Yarn dyed feeder stripes
Style no: XYZ Country USA
Buyer: ABC Fabric Viscose jersey
GSM/width 150/34-31"
Particulars Details
Amount
(LKR)
Fabric Costing
Yarn Price as per supplier
list Per Kg 500.00
Knitting charges Per Kg 50.00
Greige Fabric Cost Per Kg 550.00
Average dyeing cost 40.00
Weight loss on dyed fabric: 9.00% 53.10
Fleece brushing /Peaching - -
Loss Due To Printing - -
Sub total 643.10
Interest on yarn
prices:/margin 10.00% 64.31
Dyed Fabric Cost: 707.41
Garment costing
Avg. Fabric Consumption
(gram) 210.00 148.56
CMTP Charges
Stitching: 40.00
79.00
Cutting: 5.00
Finishing: 12.00
Packaging: 9.00
Embellishment 5.00
Trims 8.00
Sub Total 227.56
Overhead cost 62.45
Margin (after overhead) 20.00% 58.00
Ratio/Rejection 4.00% 11.60
Charges for On Board 2.00
Total price of a apparel 361.61

10. Page | 10
Further details of Packing, Trims and Embellishment costing have been shown in the following
table.
Table: 03
Trims
Particulars Consumption Rate
Amount
(LKR)
M/label 1 2.00
W/care 1 1.00
Tag N/a 0.00
Thread 10 mtr 4.00
Fusing N/a 0.00
Twill tape N/a 0.00
Mobilon tape 30 cm 1.00
Zipper N/a 0.00
Patch label N/a 0.00
Button N/a 0.00
Total 8.00
Packing materials
Tissue N/a 0.00
Board N/a 0.00
Hanger N/a 0.00
H/tag 1 3.00
Poly bag 1 3.00
Blister N/1 0.00
Carton 1/10 3.00
Other 0.00
Label logo 0.00
Total 9.00
Embellishment
Embroidery/appliqué N/a 0.00
Printing N/a 0.00
Rhin stud N/a 0.00
Lace N/a 0.00
Rib N/a 0.00
Collar N/a 0.00
Crochet lace N/a 0.00
Enzyme wash N/a 0.00
Dori 5.00
Total 5.00

11. Page | 11
2.1.2 Analysis of the method
According to the cost and management account, the company maintains two sets of departmental
rates in allocating production overheads from the two production cost centers: (1) annual
overheads rate and (2) the after-the-fact monthly overhead rates. It was also revealed that the
company uses the single rate method of cost allocation. With this method, cost in each cost pool is
not classified into a variable-cost pool and a fixed-cost pool, with each using a different cost-
allocation base but rather allocates costs in each cost pool to cost objects using the same rate per
unit of the single allocation base.
Traditional costing looks to divide the total overhead cost of a product by labor hours. This
calculation determines the overhead cost of the product per item. The overheads are in this
equation are only estimation. If traditional costing for a product means that each unit costs
Rs227.56, the company adds its profits, estimated ratio of rejection and the charges for on board
to the product. If this product is then sold for Rs361.61, then the company may assume a profit of
Rs58.00 (20%) per item; however, if the estimated cost of the product is wrong, then the company
runs the risk of making less money than expected.
This accounting system relies upon the almost arbitrary arrangement of indirect costs. There is
also little attention to the causes of cost and cost variance, or the difference between estimated
costs and real costs. A consequence of this approach can be improperly costing an item. If a
product’s cost is not accurately known, it is more difficult to predict its profitability.
The system of traditional costing is sometimes considered to be less favorable than newer costing
systems, such as ABC and lean costing, because it does not look at cause and effect. Other types
of allocation systems look at each activity and assign a cost to it. In comparison, traditional
costing lumps all the activities together and attempts to guess their overall cost.
Traditional costing does offer an advantage when direct costs are high. This is the case in
manufacturing, where costing can be applied to such overhead categories as material costs, labor
costs, and unit costs. In the latter half of the 20th century, the proportion of direct costs fell
against the proportion of indirect costs, making traditional costing ineffective. It is even more
ineffective when used in multi-product companies.
One of the major advantages of traditional costing is its simplicity; it is easy to calculate overhead
rates. This means that businesses across the world understand the traditional cost accounting

12. Page | 12
system. These systems are also relatively cost effective themselves, making them cheaper than
ABC methods.
The use of traditional costing method is Traditional costs that are viewed as reasonable by
employees can promote economy and efficiency. They provide benchmarks that individuals can
use to judge their own performance. Can greatly simplify bookkeeping.
The actual costs of each job, the standard costs for materials, labor, and overhead can be charged
to jobs. Traditional costs fit naturally in an integrated system of responsibility accounting. Can be
used to arouse interest in a subject, the standards establish what costs should be, who should be
responsible for them, and what actual costs are under control.
The final product absorption costing take consider all the costs that contribute to the final product
also include both indirect cost and direct costs that. Can be traced directly to the product such as
direct materials and direct labor prefer to cost.

13. Page | 13
2.2.1 Evaluation of Existing Method
The existing method used to allocate in DG fashions is Traditional costing method. Traditional
costing assigns manufacturing overhead based on the volume of a cost driver, such as the amount
of direct labor hours needed to produce an item.
Many manufacturing companies use the traditional costing system to assign manufacturing
overhead to units produced. Users of the traditional costing method make the assumption that the
volume metric is the underlying driver of manufacturing overhead cost. Under traditional costing,
accountants assign manufacturing costs only to products. Traditional accounting fails to allocate
nonmanufacturing costs that also are associated with the production of an item, such as
administrative expenses. Companies commonly use traditional accounting in external financial
reports because it provides a value for the cost of goods sold.
Traditional costing recognizes fixed costs in product cost. If we take DG FASHIONS annual
figures, we will get to know that there are several fixed cost that had to bear by the company, for
instance, salary (including EPF & ETF) 3,617,331, depreciation of plant, machinery & building
333,329 security 81,250 fire insurance 8830, and also financial cost 922,498. These are some of
the important fixed costs that need to bear by the company which could cost around 5,000,000.00
approx. So that these costs need to be allocated to the final output for appropriate pricing of the
products. However we will find out some problems when we try these costs to allocate into the
products, because these costs does not have a specific cost driver to split it into its
causes/usages… thus traditional costing uses all of these costs as common and allocate into final
product. As it is suitable for determining price of the product. Thus, the pricing based on
traditional costing ensures that all costs are covered.
Under the traditional method of allocating factory overhead (manufacturing overhead, burden),
most of the factory overhead costs are allocated on the basis of just one factor such as machine
hours or direct labor hours. In other words, the traditional method implies there is only one driver
of the factory overhead and the driver is machine hours (or direct labor hours, or some other
indicator of volume produced).
In reality there are many drivers of the factory overhead: machine setups, unique inspections,
special handling, special storage, and so on. The more diversity in products and/or in customer
demands, the bigger the problem of allocating all the costs of these various activities via only one
activity such as the production machine's hours.

14. Page | 14
Under the traditional method, the costs of performing all of the diverse activities will be contained
in one cost pool and will be divided by the number of production labor hours. This result is one
average rate that is applied to all products regardless of the number of activities and the
complexity of those activities. Since the costs of many of the diverse activities do not correlate at
all with the number of production labor hours, the resulting allocations are misleading.
2.2.2 Benefits of Existing Costing Method
A firm will consider the benefits of traditional costing when it determines the best accounting
methodology for reporting its financial activities. The benefits of traditional costing must be
weighed against the benefits of other types of accounting.
Easy to Apply
Traditional costing is relatively easy to apply. It's easy for managers to trace all direct costs
associated with a product, including labor and direct material costs. It's trickier to assign overhead
costs to different products. In a traditional manufacturing environment, direct labor hours,
machine hours were a simple way to apportion overhead costs. At the time traditional costing
methods were developed, direct labor was typically the biggest cost of production. Therefore, it
was used as a proxy to allocate overheads too, with managers assigning higher overheads to
products with higher direct labor hours.
Unit Cost
Traditional costing enables a business to estimate to its best ability the cost of producing one unit
of each product. This will include a look at different types of costs that factor into making the unit
product. For example, the cost of a plastic coffee mug might include the cost of raw materials,
labor or machine hours and a percent of the company's overhead costs.
Association with Direct Labor Costs
Traditional costing is most useful when a major part of the product's unit cost is related to direct
labor, or the amount of money a company will pay for human labor to produce the product. When
there are more overhead costs that aren't related to human labor, such as the cost of machines
which lose value and capacity over time, traditional costing isn't the best way for the company to
understand production costs.

15. Page | 15
Assign Costs to Production Units
Traditional costing enables the company to assign production costs to different areas of
production. This is beneficial because each area of production can be held accountable for its
productivity. A production facility that costs twice as much to produce a product as another
facility might be a target for elimination by management. Because it is economically rational to
keep production costs as low as possible, a company will relocate its facilities to where
production costs are lowest. That's why companies move operations overseas where cheaper labor
is available.
Benefits for Organizations
Traditional costing benefits certain types of organizations that need to study production costs as
fixed costs. For example, the organization would look at production costs in terms of product
level, batch level or facility level cost. The cost is fixed, and if the level of production changes,
the cost doesn't fluctuate. This concept applies to a public agency with little variability in its labor
costs (because employee labor costs are relatively steady).
2.2.3 Limitations of Existing Costing Method
However there are some points which can be doubt about the appropriateness of the current
method for the company…
Such as,
Accuracy of the pricing
Traditional costing helps ascertain the overall profitability or efficiency of the manufacturing
system but fails to provide the real cost of individual product units. For instance, there could be a
product such as, Gents undergarments, which would not need fuel & oil resource for the
production, however under the absorption costing method a part of these overheads also will be
included in the Gents undergarment production cost. This overvalues the cost as well as the price
of the product…
Strategic Decisions
In most cases by using the traditional method the management of the company will not be able to
make proper strategic decisions because the overheads for each and every output is same i.e.

16. Page | 16
Rs62.45. So that the management is unaware about the consumption of the overheads by the each
product, thus, this limits the control of the production cost of the company. However, Activity
based costing mirrors the functioning of the enterprise and contributes to strategic decision-
making processes. ABC provides the real cost of individual product units and, thereby, helps
identify inefficient or non-profitable products that eat into the profitability of other highly
profitable products.
Cost Performance
If traditional cost performance is applied, industrial marketers would not be competitive with non-
manufacturing costs. This is because traditional cost performance assumes that an order is typical
of overall operations such that all activities are performed in proportion to the volume measure
with which variable costs varies.
Ability to Distort
For a business that manufactures a large volume of a few products, traditional costing could
provide a good idea of the costs of manufacturing a product. However, as the level of diversity in
output rises, traditional costing becomes less reliable. Firms that have a lot of overhead expenses
need a more reliable method to allocate the overhead costs to different products. If a business uses
incorrect costing to allocate costs, it could price its products incorrectly. This might affect its
competitive position.
Outdated
The manufacturing environment has changed in the decades since traditional costing methods
were developed. Machines and computers are used more often. Technological developments have
led to a decreased need for labor in manufacturing processes. This means that a system that uses
direct labor as a proxy for allocating different overheads is outdated. This has led to the
development of alternatives, such as activity-based costing.

17. Page | 17
2.3.1 Implementing an alternative method
In this section we describe about an alternative method DG fashions can use instead of Traditional
Costing method. We highly recommend activity based Costing (ABC) to gain a much more
accurate overhead cost per unit which leads to more reliable unit price.
2.3.2 Activity-Based Costing
ABC is a methodology that measures the cost and performance of activities, resources, and cost
objects to provide more accurate cost information for managerial decision making. ABC is not an
accounting exercise, but rather a methodology that produces a bill of activities that describes the
cost buildup for individual products, services, or customers. By recognizing the causal
relationships among resources, activities, and cost objects such as products or customers, ABC
allows one to identify inefficient or unnecessary activities and opportunities for cost reduction or
profit enhancement.
 Comparison of traditional costing and ABC
The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs
on to direct costs to attain a total product cost. The traditional approach to cost allocation relies on
three basic steps.
1. Accumulate costs within a production or non-production department.
2. Allocate non-production costs to production departments.
3. Allocate the resulting production department costs to various products, services or customers.
This type of costing system usually allocates costs based on a single volume measure, such as
direct labor hours or machine hours. While using such a simplistic volume measure to allocate
overheads as an overall cost driver, this approach seldom meets the cause-and-effect criteria
desired in accurate cost allocation.
This method of costing has become increasing inaccurate as the relative proportion of overhead
costs has risen. This distortion of costs can result in inappropriate decision making.
ABC is therefore an alternative approach to the traditional method or arbitrary allocation of
overheads to product, services and customers.

18. Page | 18
 Application
In contrast to traditional cost accounting systems, ABC systems first accumulate overheads for
each organizational activity. They then assign the costs of these activities to products, services or
customers (referred to as cost objects) causing that activity.
The initial activity analysis is clearly the most difficult aspect of ABC. Activity analysis is the
process of identifying appropriate output measures of activities and resources (cost drivers) and
their effects on the costs of making a product or providing a service.
ABC systems have the flexibility to provide special reports so that management can take
decisions about the costs of designing, selling and delivering a product or service. The key aspect
is that ABC focuses on accumulating costs via activities, whereas traditional cost allocation
focuses on accumulating costs within functional areas.
The main advantage of ABC is that it minimizes or avoids distortions on product costs that might
occur from arbitrary allocation of overhead costs
Figure 1. Framework of Activity Based costing

19. Page | 19
 Steps in development of an ABC System
ABC uses cost drivers to assign the costs of resources to activities and unit cost as a way of
measuring an output.
There are four steps to implementing ABC.
1. Identify activities
The organization needs to undertake an in-depth analysis of the operating processes of each
responsibility centre. Each process might consist of one or more activities required producing an
output.
2. Assign resource costs to activities
This involves tracing costs to cost objects to determine why the cost occurred. Costs can be
categorized in three ways:
i. Direct – costs that can be traced directly to one output. For example, the wood and paint
that it takes to make a chair.
ii. Indirect – costs that cannot be allocated to an individual output, that is, they benefit two or
more outputs, but not all outputs. For example, maintenance costs or storage costs.
iii. General/administration – costs that cannot be associated with any product or service.
These costs are likely to remain unchanged, whatever output is produced. For example,
salaries of administration staff, security costs or depreciation.
3. Identify outputs Identify all of the output for which an activity segment performs activities and
consumes resources. Outputs might be products, services or customers.
4. Assign activity costs to outputs
This is done using activity drivers. Activity drivers assign activity costs to outputs (cost objects)
based on the consumption or demand for activities.

20. Page | 20
 Reported benefits
• ABC provides a more accurate method of costing of products and services.
• It allows for a better and more comprehensive understanding of overheads and what
causes them to occur.
• It makes costly and non-value adding activities more visible, so allowing managers to
focus on these areas to reduce or eliminate them.
• It supports other management techniques such as continuous improvement, scorecards and
performance management.
 Reported drawbacks
• ABC can be difficult and time consuming to collect the data about activities and cost
drivers.
• It can be costly to implement, run and manage an ABC system.
• Even in ABC some overhead costs are difficult to assign to products and customers. These
costs still have to be arbitrarily applied to products and customers.
2.3.2 Opportunities in implementing ABC method
• Assesses costs of individual activities, based on their use of resources
• Enables accurate costing of all activities to be obtained throughout an organization.
• Easy to identify where high (and low) costs are being incurred and the cause.
• A valuable tool for both business and process improvement
• Helps with future product planning e.g. the cost of all activities associated with a product
or service can be accurately determined before it is launched. This can then help with
determining pricing, and any associated expenditure

21. Page | 21
2.3.3 Barriers in Implementing ABC method
 Identifying and aggregating activities
 Assigning resources to activities
 Selecting cost drivers
 Assigning activity costs to cost objects
 Internal resistance
 Top management support
 Uncertainty of ABC benefits
 Data collection difficulties
 Suitable accounting staff, computer staff
 Inadequate computer software
 Amount of work and time needed
 Human resource availability
 Lack of knowledge experience
 Lack of software availability.
The above list indicates that technical issues such as: defining activities, selecting cost drivers and
assigning resources and costs to activities are common difficulties encountered during the
implementation stage of ABC among the studies. Based upon an analysis of the above table, the
barriers to and difficulties of implementation of ABC systems may be classified into three distinct
strands, as illustrated in the following chart:

22. Page | 22
Figure 2. Barriers and difficulties classification
Given the frequency with which technical issues have been identified as constituting
“difficulties”, it is perhaps surprising that so little empirical research has been devoted in this
area. An aspect of ABC implementation that researchers have neglected is the process of
designing the ABC model – i.e. the resources, activities and cost drivers that are the ‘economic
map’ of the organization.
Barriers and Difficulties to
ABC implementation
Technical Issues Behavioral Issues Systems Issues
- Identifying activities
- Aggregating activities
- Assigning resources to
Activities
- Selecting cost drivers
- Assigning activities
costs to cost objects
- Internal resistance
- Top management support
- Uncertainty of ABC benefits
- Human resource availability
- Lack of knowledge/
Experience
- Satisfied with current systems
- Data collection difficulties
- Inadequate computer
software
- Suitable accounting staff,
computer staff
- Amount of work & time
needed

23. Page | 23
Conclusion
The choice of a system for calculating costs can have an important strategic implication. Using
the wrong product costing system can lead to business failure. Therefore, it is imperative that
companies should study and know whether ABC may be applicable to the current set up of their
business organization rather than continuously using standard costing system that they have been
using in the past. Once the appropriate costing system that best suit the business operation was
determined, e.g. ABC, it is important that accountants must understand the basics of the new
system that will be installed. The use of Activity-Based Costing technique will require a thorough
understanding of the people implementing and using it. Without the necessary training and
expertise, like all other techniques, its application will prove to fail.
Furthermore, the company needs more than just one allocation base to effectively allocate
production overheads to product. In this regard Activity-Based Cost (ABC) method is the best
recommendation if its adoption and application is financially convenient and practically feasible
for the company. Better still the company can adopt multiple bases in allocating its production
overhead cost if it cannot afford the use of ABC method. Finally, the company can reduce its
profit margin so as to enable the accounts department ensure full absorption of production
overheads whereas it continues to maintain its loyal customers when the firm is engaged in price
competition.

24. Page | 24
References
1. http://digbig.com/4xtmc
2. www.offtech.com.au/abc/Home.asp
3. http://digbig.com/4xtmg
4. www.businessfinancemag.com
5. http://asbbs.org/files/2009/PDF/M/MyersJ.pdf
6. http://www.mccc.edu/~horowitk/documents/Chapter04_002.pdf
7. http://www.accountingcoach.com/blog/taditional-method-cost-accounting
8. www.newdgfashions.com/
9. www.slideshare.net/
10. http://books.google.lk/books/about/Management_Accounting.html?id=3Ki8osgX90oC&redir_esc
=y
11. Yair M. Babad & Bala V. Balachandran (1993); Cost Driver Optimization in Activity-Based
Costing, THE ACCOUNTING REVIEW;
12. R.L. Weil, and M.W. Maher, Handbook of Cost Management, New Jersey, John Wiley & Sons,
2005.

25. Page | 25
Appendices